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Realistbear

Offset Mortgage-- A Scam Or A Good Deal

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What does anyone think of the "offset" mortgage? It is a simple mortgage that is linked to another account.

E.g. lets say you borrow £100k at a variable rate starting at 3.75%. If you have £100k in a linked savings account you effectively pay no interest on your loan as the interest on the linked account is made to equal to the amount of the interest that is payable on the mortgage.

As far as I can see it, provided you keep the same amount in your savings account as you have borrowed you have an effective fixed rate mortgage for the duration of the loan. Provided you keep the equivalent amount in the linked account.

If you do not keep the same amount in the linked account as you have borrowed then the amount that is in that account offsets your mortgage. So lets say you borrowed £100k and only have £50k in the linked account. One half of your loan is at the usual rate (3.75% currently) and the other half is effectively at zero % as it is offset by your linked account.

Is it a con or a VERY good deal?

http://www.natwest.com/personal/mortgages/g3/offset-flexible.ashx

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http://en.wikipedia.org/wiki/Offset_mortgage

Tax advantagesWithin the UK offset mortgages are often marketed as offering "tax efficient" savings. Interest generated within deposit accounts for UK residents is deemed income and is taxed at source (the rate has been 20% since 1983). Within an offset mortgage arrangement the notional 'credit' balance does not generate income but instead saves an amount of mortgage interest that would otherwise be charged. As no interest payment is made there is no tax charge. This is equivalent to being paid the interest on the credit balance tax-free.

Sounds too good to be true--if you are one of the few with savings to offset. :blink:

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It's a good deal, in my opinion.

I think it's best viewed as a more flexible way of overpaying the mortgage, i.e. which allows you to reduce mortgage interest whilst still keeping free cash in case an 'opportunity' arises.

If you can get an offset mortgage at the same rate as a non-flexible mortgage, offset is always the way to go IMHO. I think First Direct's rates are pretty much the same for offset/non-offset.

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http://en.wikipedia.org/wiki/Offset_mortgage

Tax advantagesWithin the UK offset mortgages are often marketed as offering "tax efficient" savings. Interest generated within deposit accounts for UK residents is deemed income and is taxed at source (the rate has been 20% since 1983). Within an offset mortgage arrangement the notional 'credit' balance does not generate income but instead saves an amount of mortgage interest that would otherwise be charged. As no interest payment is made there is no tax charge. This is equivalent to being paid the interest on the credit balance tax-free.

Sounds too good to be true--if you are one of the few with savings to offset. :blink:

As you say, worthy of serious consideration for higher-rate taxpayers with savings.

But, the headline rates on offer are not always very competitive, so some careful calculation required to see if your circumstances can make it work in your favour.

They've been around for a while, although a bit of a niche product. Of course, no-one had any savings before so they were not so popular! Intelligent Finance used to sell a fair few as I recall.

Edited by cheeznbreed

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I can't believe you've never heard of them - they are a very good deal.

You don't even need savings - just the future potential of them.

Particularly good if you're 40% taxed.

It the equivalent to getting X% tax free on any savings you make between now and paying off the mortgage.

Plus, it gives you the flexibility of being able to effectively "pay off" large sums of your mortgage whilst still having access to the capital should you need it.

Are you thinking of getting one? Who are you considering for the mortgage, RB?

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I'm giving this very serious consideration.

The other advantage is that you pay down the mortgage more quickly, as more of your payments are paying off the capital.

I'm waiting for HPC to converge with my savings so that I can buy with a 50% mortage and still have savings left to offset most or all of the mortgage interest.

That way I still have a good rainy day fund if I need it, with the caveat that if I access it then I will start to pay mortgage interest.

And as I pay it off I can move savings into more effective long term investments.

My outgoings on accomodation will also decrease, so extra funds to either pay down the mortgage faster or to invest.

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I would say it is a good idea for people with good savings and irregular income it requires a degree of money management....the interest rate is mostly variable and higher than you could normally pay.

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But if you have that amount of savings - why would you want the mortgage, why would you not just pay cash for the house using the savings?

Because the time comes when you need a new boiler or car or some such thing! :huh:

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I can't believe you've never heard of them - they are a very good deal.

You don't even need savings - just the future potential of them.

Particularly good if you're 40% taxed.

It the equivalent to getting X% tax free on any savings you make between now and paying off the mortgage.

Plus, it gives you the flexibility of being able to effectively "pay off" large sums of your mortgage whilst still having access to the capital should you need it.

Are you thinking of getting one? Who are you considering for the mortgage, RB?

Natwest are offering me an offset at 3.75%. 75% downpayment on the property-- loan over 6 years. Purpose is to have some cash as backup. Fees are not too bad either £299 set up cost. No early repayment penalties.

Seems that you are getting an interest free loan as the offet always equlas the mortgage rate no matter how high it may go.

Edited by Realistbear

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the interest rate is mostly ... higher than you could normally pay.

Exactly. The worst thing about an offset mortgage is that the rates always seem to be higher.

I think First Direct do a good one because you can offset multiple accounts including your current account but they offer the same rate for their 3 year fixed offset as they offer for their 5 year fixed normal.

I would consider one if i was buying somewhere that needed work doing but not necessarily straight away. Borrow enough to cover the work and then only spend the money (and therefore start paying the extra interest) when i was ready.

Of course the market has to crash first but I think this is what I will do when i do move.

Edited by MC Fur Q

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Yes, the flexibility to get a cheap personal loan, without having to apply for it is very appealing. Once the mortgage is approved, you're all set to become your own bank manager, as it were.

Of course you have to be capable of "being your own bank manager"! :huh:

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Exactly. The worst thing about an offset mortgage is that the rates always seem to be higher.

I think First Direct do a good one because you can offset multiple accounts including your current account but they offer the same rate for their 3 year fixed offset as they offer for their 5 year fixed normal.

I would consider one if i was buying somewhere that needed work doing but not necessarily straight away. Borrow enough to cover the work and then only spend the money (and therefore start paying the extra interest) when i was ready.

Of course the market has to crash first but I think this is what I will do when i do move.

That has been and is my thinking. The offset allows you to keep a pool of cash for improvements such as a vase with twigs in it.

AS far as I can see it--the IR is a non-issue provided your offset is equal to the amount of the loan. Rates could go to 15%--100% even. Not relevant.

The tax advantages seem to be good also--as the interest on your offset account is tax free as it is being applied to a loan.

Bottom line: looks like its a YES it is a good deal and no its is not a scam.

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We've got the One Account with RBS.

Our mortgage was £100k but we'd got about £50k in savings earlier this year.

We were paying 2.99% with Bank of Ireland for our mortgage and the One Account rate is 3.65% so the headline rate is worse.

The good things are:

Tax free savings - 3.65% "tax free" on the savings is like 5% in a normal account

We can get to the money any time we like, if a really good opportunity came along I could take the £50k back and only pay 3.65% to borrow it.

I'm self employed so can offset against my mortgage before paying my tax

Saving begats saving. We are now £100 a month better off, and offsetting that makes us even more better off next month.

Bad points:

Really keen followers of investments could beat the return

I'd recommend them to anyone with financial discipline (e.g. the types not to just go out and spend the £50k sitting there!)

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That has been and is my thinking. The offset allows you to keep a pool of cash for improvements such as a vase with twigs in it.

None of those vases :huh: please Mr RB!

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We've got a Woolwich offset. We're saving about £8 a day in interest. Our monthly payment is still the same, so we're clearing an extra £240 odd of capital every month without even trying.

We're currently only paying interest on just over half the outstanding mortgage amount, while having easy access to a decent savings pot (which we wouldn't have if we paid off half the mortgage).

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I was wondering why the bank was so keen to push this type of mortgage and if it may have something to do with them wanting to increase their balances.

IN our case we will have on deposit more or less the same as the mortgage which must be good for them.

The lack of an early repayment penalty is also useful as you can then switch to a fixed rate or tracker should conditions dictate.

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The biggest disadvantage is if YOU get into difficulties...the bank simply takes your savings and pays the mortgage...if your accoutns are separate, and in different banks, you could in theory default on the mortgage, claim your SMI and hide your savings in a pot of PMS.

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The biggest disadvantage is if YOU get into difficulties...the bank simply takes your savings and pays the mortgage...if your accoutns are separate, and in different banks, you could in theory default on the mortgage, claim your SMI and hide your savings in a pot of PMS.

Yes I had thought of that one too! :huh:

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surely, you'd be the first to know whether you are going to get into problems, so step one would be to extract all you money...?

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I have an offset mortgage with the abbey and it's a very good deal. One thing is that it always makes you feel as though you are in debt as your bank account it always negative - this might be a good thing or a bad thing depending on how you deal with debt! The other thing is that you need self discipline as you can put in or remove as much cash as you like.

The best thing is that any interest I 'earn' (i.e. offset) is effectively tax-free.

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I have an offset mortgage with the abbey and it's a very good deal. One thing is that it always makes you feel as though you are in debt as your bank account it always negative - this might be a good thing or a bad thing depending on how you deal with debt! The other thing is that you need self discipline as you can put in or remove as much cash as you like.

The best thing is that any interest I 'earn' (i.e. offset) is effectively tax-free.

...and at the same rate as the mortgage rate. ;)

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The biggest disadvantage is if YOU get into difficulties...the bank simply takes your savings and pays the mortgage...if your accoutns are separate, and in different banks, you could in theory default on the mortgage, claim your SMI and hide your savings in a pot of PMS.

Possibly the other big disadvantage is that if they get into difficulties and go under, your debt to them remains while you can kiss goodbye to any deposits you hold over £85,000. Then again, they've already proved that the banks are "too big to fail", so maybe this is irrelevant.

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  • 284 Brexit, House prices and Summer 2020

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